BLOG: Why the next six months could be the best performing for stock markets

People like to rationalise the world around them and often see patterns where none exist. But given previous trends, how much attention should investors pay to the Halloween effect?

There is a whole discipline in investing that follows charts and tracks the daily movement of share prices to try and identify a pattern or trend helping to predict where the price will go next.

Personally I haven’t held much stock in this school of thought. Charts are easy to manipulate – for instance if you change the start date, everything can look very different.

But some patterns do exist; the adage of ‘sell in May, go away and come back on St Ledger day’ has a long history and while taking it literally is probably not the best course of action for long-term investors, the summer period tends to be one which delivers lower returns.

There is a variation of this saying known as the six-month effect, or in the US, the Halloween effect and it is a surprisingly powerful trend.

The premise is that the six months from 1 November to the 30 April are by far the best performing six months of the year for stock markets. The trend is true across a large number of markets.

The chart below shows the average returns in the six months from November to April compared to the subsequent six months. While the Halloween effect is a US phenomenon, it is actually in Japan and Europe which see the largest differences.

As is always the case with any adages, there are exceptions to every rule and the Halloween effect does not happen every year. Some notable exceptions in recent times have been in 1999/00 when the markets saw the collapse of the dotcom bubble and investors lost money.

Likewise, the market pulled back in 2002/03 as tensions rose ahead of the US invasion of Iraq and more recently, the fallout of the global financial crisis continued to hit stock markets in 2008/09.

The curious thing about the Halloween effect is that no-one has worked out why it may be happening. There are a number of potential reasons however. Companies and fund managers are more active in the winter months as the end of the calendar year approaches and they need to improve their figures.

Christmas tends to be a good time for markets as investors are generally more positive, possibly having enjoyed too much glühwein. Also the last few months of the financial year tend to be among the most active as investors use up their tax allowances, take out an ISA or SIPP before they are gone.

Whatever the cause, the Halloween effect does exist and while it’s probably not a good idea to take it to extremes and hold cash for six months of the year, the end of October and start of November might be a good time to make any new investments into your ISA or pension instead of waiting until the end of the tax year in April.